May 17 (Bloomberg Government) -- When the U.S. Centers for
Medicare and Medicaid Services needed help managing a telephone
hotline last year, it didn’t open up competitive bidding for the
work. The $929 million contract, one of the agency’s biggest,
was instead given to a company that’s done the job since 2002.

The award to Vangent Inc. highlights concerns among U.S.
lawmakers as they crack down on waste at the Medicare agency,
which is gearing up to help expand health-care coverage to more
Americans.

At a time when federal departments are using more
competition among suppliers to pare costs, the Medicare agency
is increasingly using single-source deals, according to
Bloomberg Government data. Almost a third of all contracts at
the agency last year weren’t competitive, up from about 28
percent in 2000. The percentage fell for all agencies combined.

“Absolutely, it’s a concern,” said Steven Schooner, co-
director of the Government Procurement Law Program at the George
Washington University Law School. “The way you get value for
money is by injecting market-based competition.”

The Centers for Medicare and Medicaid Services, or CMS,
relies “heavily” on a small number of contractors, according
to a fact sheet prepared for a hearing by Senator Claire
McCaskill, a Missouri Democrat who heads a subcommittee on
contracting oversight.

The 10 largest recipients of CMS contracts received more
than 40 percent all CMS contract dollars last year, according to
Bloomberg Government data.

As the U.S. health-care overhaul begins to take shape, the
CMS is being watched more closely. The agency already provides
health care to almost a third of all Americans.

CMS must cut as much as $500 billion from Medicare over the
next decade, and try to do so without reducing care for seniors.
It also must add an estimated 16 million uninsured Americans to
the ranks of Medicaid, the federal and state health program for
the poor.

MaCaskill and other lawmakers question the agency’s ability
to take on these tasks, pointing to its accounting standards and
contracting practices. The Government Accountability Office, the
investigative arm of Congress, has warned of “pervasive
deficiencies” in CMS contract management.

‘Run-Away Costs’

The accord with Vangent, valued at as much as $929 million
through 2013, is a so-called cost-incurred contract. That
payment structure, potentially more expensive than a fixed-price
deal, drew fire from Senator McCaskill.

“There is not an incentive on the part of the contractor
to keep costs down,” McCaskill said at a hearing on CMS
contracts she held in Washington on April 28. “Whatever the
cost is, it’s going to be paid. If you don’t have someone
looking over their shoulder, you’re going to have run-away
costs.”

McCaskill said there will be “a lot of scrutiny” on the
agency and how it handles contracts.

Non-Competitive Contracts

The 31.8 percent of contracts without competitive bidding
at CMS compares with 18.7 percent for the Homeland Security
Department, 21.7 percent for the Transportation Department and
12.6 percent for the Education Department. The figure for all
federal agencies fell to less than 31 percent in 2009 from 37
percent in 2000, Bloomberg Government data showed.

Some agencies relied more on non-competed contracts than
did CMS. The Department of Housing and Urban Development awarded
32.4 percent of its contracts without competition, while the
Department of Defense’s ratio was 36.7 percent.

George Washington University’s Schooner, a former
procurement specialist in the Office of Management and Budget,
said there may be cases when a lack of competition can be
justified if costs of shifting contractors are too great. As a
general rule, though, increasing reliance on non-competitive
contracts may be a troubling sign, he said.

In the case of the Vangent contract, the agency was
permitted to award it last year as “follow-on” work because
Vangent had won the contract in a competition in 2006, CMS’s
Ashkenaz said.

Changing contractors for the Medicare hotline could take a
year to complete and cost the agency $27 million to as much as
$97 million, according to Ashkenaz.

“During a 12-month transition period, CMS risks less than
optimal customer service to the beneficiaries while the new
contractor works through a learning curve,” he said.

1-800-MEDICARE

The 1-800-MEDICARE line handles can more than 1 million
calls a month and employ more than 4,000 customer service
representatives.

Contract work through the Department of Health and Human
Services -- chiefly the Medicare hotline -- accounted for about
44 percent of Vangent’s $584 million in 2009 revenue, according
to an annual statement filed with the Securities and Exchange
Commission.

Vangent’s history with CMS goes back to 2002, when the
company -- then known as NCS Pearson Inc. -- won a contract
valued at about $225 million through an open competition.

Airport Screening

A federal audit faulted NCS Pearson in 2005 for its work
for the Transportation Security Administration in assessing and
hiring airport passenger screeners after the 2001 terrorist
attacks in New York and Washington. The company denied
wrongdoing.

In 2008, the company agreed to pay $5.6 million to settle
allegations that it submitted false claims in connection with
airport screening, the Justice Department said at the time.

In 2007, Pearson Government Solutions, the successor to NCS
Pearson, changed its name to Vangent and was purchased by
Veritas Capital, a New York-based private equity firm that
invests in companies providing services to governments.

Kerry Weems, a former acting administrator of CMS, joined
Vangent in December as senior vice president and general manager
of its Health Systems group.

According to federal acquisition rules, cost-reimbursement
contracts like the one awarded to Vangent “are suitable for use
only when uncertainties involved in contract performance do not
permit costs to be estimated with sufficient accuracy to use any
type of fixed-price contract.”

Call Volume

Ashkenaz, the CMS spokesman, said a fixed-price contract
was not practical in the case of the Medicare hotline because
CMS couldn’t always predict when the hotline would experience a
surge in call volume that would require additional staff.

He said the hotline has about 2,650 service
representatives. He said the number can jump to more than 4,000
during peak periods, often in the fall.

Most contracts for call-center operations are typically
some form of fixed-price agreement, with some adjustments to
allow for incentives for better performance or penalties for
poor performance, said David Butler, executive director of the
National Association of Call Centers.

“If this is a sole-source and it allows for price
escalation, that’s great for the contractor but it seems sort of
odd to me,” Butler said.